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Dr Hayward invests $10,000 for 3 years in a bank certificate of deposit (CD) that pays 6% compounded monthly
Dr Hayward invests $10,000 for 3 years in a bank certificate of deposit (CD) that pays 6% compounded monthly. When the CD mature at 3 years, the good doctor then takes the maturity value (principal plus interest) and invests that amount for 5 years in an investment fund paying r= 7.2% compounded annually. 1 8 1 years 0 3 Calculate: (a) maturity value at 3 years of first investment (b) maturity value at 8 years (c) S interest earned over the combined 8-year investment period
Expert Solution
Future value of investment is calculated as: F= P*(1+r/n)^(n*t); where F is Future value of the investment, P is Present value of the investment, r is the annual interest rate, n is the number of times the interest rate is compounded and t is the number of years.
a).
Maturity value at 3 years of first investment= 10000*(1+6%/12)^(12*3)= $11966.81
b).
Maturity value at 8 years= 11966.81*(1+7.2%)^5= $16941.51
c).
Interest earned over the combined 8-year investment period= Maturity value at 8 years-Initial Investment amount
16941.51-10000= $6941.51
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